There are various types of estate trusts and one thing is for sure that using trusts is another way that you can reduce probate. Trusts are a great way to maintain control of assets during and after death. There are many types of trusts and to create one, you would need a trustee and a settlor. The settlor would be the individual who would establish the trust and proceed to transfer property to the trust. The trustee would be responsible to maintain the property for the benefit of the beneficiaries.
Types of Estate Trusts
There are many types of estate trusts one could open but below we’ll discuss inter-vivos and testamentary trusts. One could open an inter-vivos to transfer or gift property during one’s lifetime as opposed to a testamentary trust when transfers take effect on death, usually as part of a will.
Inter-Vivos Trusts
- Revocable Trust
- When the settlor transfers in property into the trust, the property can be transferred back in the hands of the settlor
- Irrevocable Trust
- When property is transferred to the trust, it cannot be transferred back.
- Spousal Trust
- Set up for the benefit of the spouse and no one else can have access to the trust’s assets.
- Family Trust
- Property is transferred into the trust for the benefit of family members
- Commercial Trust
- Commercial trusts are known to be used for investment purposes. Mutual funds would be considered commercial trusts.
- Alter Ego Trust
- Alter Ego Trust have an age requirement of 65. It’s created for the benefit of the settlor who is the only individual able to be entitled to the trusts income.
- Charitable Trust
- Charitable trusts are set up for the benefit of a charity who would be the beneficiary.
- Bare Trust
- In this case, the beneficiary would have sole interest in the property or assets inside the trust and may take over possession at any time.
Above we’ve listed the most common types of estate trusts but before you decide which one you should open, it’s recommended that you discuss with your financial advisor and lawyer.
Testamentary Trust
Testamentary Trusts are created on the day a person dies with instructions written out in the will ahead of time. They’re a popular estate planning tool as it allows the trustee to effectively distribute income to minor children or spouse in a tax efficient manner. Testamentary trusts are taxed at the highest marginal tax rate with two exceptions mentioned below. Before 2016, testamentary trusts were taxed favorably at the same rates as personal income tax but that has since changed.
- Graduated Rate Estate (GRE)
- These trusts are registered as a GRE in the first year of trust’s taxation. They arise as a consequence of the person’s death and are taxable at marginal rates for the first 36 months. Only one GRE is allowed per deceased testator.
- Qualified Disability Trust
- The beneficiary of this type of trusts would qualify for the Disability Tax Credit. These trusts are taxed at the marginal tax rate.
These two types of estate trusts mentioned above are complex and a lawyer’s professional advice is recommended.
